Even Goldman Sachs Says China Is Cooking The Books

That China openly manipulates its economic data, especially around key political phase shifts, such as one communist regime taking over for another, is no secret. That China is also the marginal economic power (creating trillions in new loans and deposits each year) in a stagflating world, and as such must be represented by the media as growing at key inflection points (such as Q4 when Europe officially entered a double dip recession, and the US will report its first sub 1% GDP in years) as mysteriously reporting growth even without open monetary stimulus (something we have said the PBOC will not engage in due to fears of importing US, European and now Japanese inflation) is critical for preserving hope and faith in the future of the stock market, is also very well known. Which is why recent market optimism driven by “hope” from Alcoa that China is recovering and will avoid yet another hard landing, and Chinese reports of a surge in Exports last week, are very much suspect. But no longer is it just the blogosphere that is openly taking Chinese data to task – as Bloomberg reports, even the major banks: Goldman, UBS and ANZ – are now openly questioning the validity and credibility of the goalseek function resulting from C:\China\central_planning\economic_model.xls.

China’s unexpected surge in exports last month renewed concern from analysts at Goldman Sachs Group Inc., UBS AG and Australia & New Zealand Banking Group Ltd. (ANZ) that statistics from the nation can be unreliable.

The 14.1 percent jump from a year earlier was the biggest positive surprise since March 2011, according to data compiled by Bloomberg. The increase didn’t match goods movements through ports and imports by trading partners according to UBS, while Goldman Sachs and Mizuho Securities Asia Ltd. cited a divergence from overseas orders in a manufacturing index.

Smaller trade gains could signal a less robust recovery from a seven-quarter slowdown just as Australian Treasurer Wayne Swan says the economic rebound is a sign of improving global demand. Accurate statistics from the world’s second-biggest economy are increasingly important for domestic and foreign investors and for China’s government, ANZ’s Liu Li-Gang says.

Too good to be true:

ANZ’s Liu and colleague Louis Lam published research last week that underscored doubts about the quality of China’s economic data. They found that quarterly GDP, industrial production, fixed-asset investment and inflation data published in percentage terms failed to conform to “Benford’s Law,” which holds that in any series of numbers certain patterns will be found only if the statistics are naturally generated.

Li Keqiang, who may succeed Wen Jiabao as premier in March, was quoted in 2007 as saying he watched figures on power, rail cargo and loans because gross domestic product numbers were “man-made.” Li’s remarks were in a U.S. diplomatic cable published by WikiLeaks in late 2010.

One reason for the “surge” in recent data may be the demand of the new Politburo to telegraph that all is well following the latest Congress which took place in November, and that the economy is once again picking up, even if in reality it isn’t:

After China’s statistics bureau reported third-quarter GDP in October, Standard Chartered Plc analysts said the 7.4 percent increase was “too good to be true” when compared with the slowdown in electricity production and the readings of a manufacturing index, while London-based Capital Economics Ltd. said its own analysis indicated expansion of about 6.5 percent.

The median forecast for December exports in a Bloomberg survey of 40 economists was for a 5 percent gain, with the highest estimate at 9.2 percent, after November’s 2.9 percent growth. Goldman Sachs, ranked by Bloomberg as the most accurate forecaster for the indicator, projected a 7 percent rise.

The increase, which was the biggest since May, could indicate exporters’ rush to finish year-end orders and government pressure to report exports before the end of the year to reach the government’s 2012 target of 10 percent growth, Shen Jianguang, Mizuho’s Hong Kong-based chief Asia economist, said in a Jan. 10 note.

A possible explanation for how Chinese companies are cooking their export books comes from none other than Goldman:

“It is possible that local governments may have tried to boost exports data by either making round trips in special trade zones” or by exporting “earlier than otherwise in an attempt to improve the annual exports data,” Goldman Sachs’ Beijing- based economists Yu Song and Yin Zhang wrote the same day.

Rushed shipments and even faked exports to secure tax refunds may have contributed to the stronger growth data, according to Alistair Thornton and Ren Xianfang, Beijing-based analysts at IHS Inc.

Some trading companies are turning to transportation providers like Shenzhen Global Express Logistics Ltd. for help in shipping goods through so-called bonded zones to claim export tax rebates or charge higher import prices for goods without them physically leaving the country. Shenzhen Global offers customs clearing and other freight services including a “one-day tour,” Lin Yongtai, a manager with the company in the city bordering Hong Kong, said in a telephone interview.

For a fee of 1,000 yuan ($161) per vehicle per day, the company will drive trucks into warehouses in bonded zones, where cargo must clear customs, so that businesses can obtain a refund of value-added tax on the “export” of their products or boost sale prices for goods that carry the cachet of being imported.

“A poor villager can boast he has thousands of yuan of turnover every day, but people later discover he only has one bull — he takes the bull out every morning and brings it back every evening,” Lin said. “The same applies to some parts of China’s foreign trade.”

Of course, there is also the simple test of matching one country’s exports to another one’s imports (after all, it is a closed loop). Once more, it appears that China is literally pulling numbers out of thin air:

UBS economists led by Hong Kong-based Wang Tao pointed to a “quite obvious discrepancy” in the growth of China’s exports to Taiwan and South Korea and those economies’ reported imports from China in recent months, even as historically they have tracked each other well.

Finally, that China is openly making up numbers is no surprise: it will continue doing that until, like everywhere else, the discrepancy between perception and reality (usually manifested in the case of China by a lot of angry people breaking something or simply rioting) becomes too glaring for even the most optimistically inclined to ignore.

What is a surprise is that it is none other than the banks – the primary carriers of the status quo gene – who are implicitly pulling the rug out from beneath the economy that is supposed to once again, as in 2008 and 2009, provide the bridge from a contracting “here” to a growing “there.”

The question is why?

Is this an attempt to undermine the Chinese leadership which has so far merely sought to grow the economy by fiscal stimuli, while avoiding monetary ones: i.e., finally get the PBOC involved in not only growing the money supply (if not the economy), but in joining the rest of the world’s central banks in a race to debase? And if indeed this is the case, what happens when China begins growing its own local inflation in addition to importing everyone else’s.

Or is it a way to force a drop in a market that hangs on to every piece of good news like a drowning meth addict clutching at the tiniest of straws, allowing the same “skepticism-inducing” banks to buy at cheaper prices?

Or, more likely, is this merely a red herring to be used as a scapegoat when the latest dead cat bounce, so optimistically telegraphed by every sell side strategist, fails to materialize once more? After all: when in doubt, blame it all on the upcoming debt ceiling fiasco, and now: made up Chinese data.

1 thought on “Even Goldman Sachs Says China Is Cooking The Books”

I think this is happening because the banks are looking for a skapegoat……this is another bubble that is breaking…….the world economy has been imploding for several months. Unfortunately, there isn’t enough money in the world to cover up, clean up, etc. China, US, Euro, bonds (national and corporate), and all the debt they have been selling back and forth for years. If they do print more, none of the currencies will be of any value, and the entire system will collapse. They need to pull it together ASAP, it is holding with chewing gum and rubber bands right now.

These are serious times. I only wish we had more mindful leaders, this is the wrong time for more greed. We need to start building things and buying them here at home again.

The only growth over the past 12 years has beend debt. We have finally hit the tipping point.
Not good times ahead. Thanks for the article.